Blinder: Keynesianism is Right, Because Keynesians Are Really Smart

Alan Blinder’s defense of QE2 is as feeble as Mankiw’s defense of “emergency measures” more generally. Blinder’s argument is simply that QE2 isn’t all that different from standard Keynesian fine-tuning (true) and that Ben Bernanke is smarter than critics like Sarah Palin (duh).”To create the fearsome inflation rates envisioned by the more extreme critics, the Fed would have to be incredibly incompetent, which it is not.” This reminds me of Janet Yellen’s unfortunate 2009 statement that “the Fed’s analytical prowess is top-notch and our forecasting record is second to none. . . . With respect to our tool kit, we certainly have the means to unwind the stimulus when the time is right.”

Blinder apparently thinks that the anti-Keynesian backlash is just some quibbles about this little jot or tittle. He cannot grasp that the growing sentiment against monetary central planning, against fine-tuning, against the whole statist monetary establishment, is a rejection of Keynesianism at the most fundamental level. People are tired of the philosopher kings and their pretense of knowledge.

But this is folly to kings. Consider Blinder’s criticism of Bernanke:

What the Fed proposes to do is neither foolproof nor perfect. Frankly, it’s not the policy I would choose. As I’ve written on this page, I’d like the Fed to purchase private securities and to reduce the interest rate it pays on reserves, even turning it negative. The latter would blast reserves out of banks into some productive uses.

Ah, to think like a king! But the days of the monetary monarchy may be numbered.

Sure. My point is that the feasible alternatives, as Blinder sees them, are QE2 versus another form of monetary central planning. Less central planning — which is the real goal of the anti-Keynesian movement — is ruled out ex ante as inconceivable.

3.srp | 16 November 2010 at 4:33 pm

Remember the folk wisdom from Samuelson that Keynes’s General Theory took such hold among the smarter young economists because it was so obscure? Check this out:

Looks to me like support for having the Fed return to adjusting the Fed funds rate in order to have the price level rise 2 percent each year from wherever it happens to be. The failed “normal” monetary policy that Taylor advocates.

5.srp | 16 November 2010 at 4:42 pm

What’s particularly silly about Blinder’s narrow view is how it assumes that all recessions are the same. Even if you thought the Keynesian playbook has worked beautifully in the last few downturns, the current one comes after a financial panic, is accompanied by a broad desire to delever balance sheets, and has occasioned a whole slew of uncertainty-raising government policies and suggestions of policy. Pushing the US closer to the edge of insolvency and/or currency debasement is not the obvious way to liberate animal spirits at the moment. (I also wonder if the negative income/saving effects of low interest rates are not canceling much if not all of their stimulative effect, but that’s speculative.)

Has Blinder even looked at Rogoff and Weigalt’s book, hardly the work of two flat-earthers?

Right, it also ignores the inter-industry, microeconomic particulars of the current crisis, such as the massively swollen housing and mortgage-lending sectors. Reallocating assets across sectors isn’t part of the equation.

7.LTPhillips | 16 November 2010 at 7:49 pm

I could not recall a more feeble defense of a policy or program than Blinder’s defense of QE2 and Bernanke’s expertise; indeed, it was so lame I was surprised the WSJ published it. From his perch at the Fed, Bernanke failed to see the creation of the housing bubble or to understand its scope or significance after it began to unwind. He opines that monetary policy can’t be expected to solve every problem facing the economy, but acts as if it could. Everything will be fine until there is a serious run on the dollar or international investors loose interest in Treasury bonds. On that day, hell will break loose.

8.srp | 16 November 2010 at 10:31 pm

Today’s WSJ: “Bond Market Defies Fed”. Maybe Bernanke’s quest to raise inflation expectations is actually working and long rates are going up a la the Fisher equation…

9.Bill Woolsey | 17 November 2010 at 6:14 am

Blinder was right.

Nothing in his argument is inconsistent with the notion that there is excess capacity in the housing industry and a need to shift labor and other resources to more valuable uses.

Crowding out arguments about fiscal policy don’t apply when there is an excess demand for money. (I still think it is a bad idea.)

And QE2 is just open market operations. It is only novel to those wed to targeting the Federal Fund rate.

10.Vasile | 17 November 2010 at 12:55 pm

@Bill

Now you only have to prove, that excess demand for money is excess demand for nominal money. Than it’s easy as it gets. Printing money… Where’s the problem?

Now, if what you’re calling “excess demand for money” is just an external manifestation of some other thing, namely, people trying to stop the pattern of over-consumption (in real terms), than… We (unfortunately, we), we have another kind of problem.

So for QE to work it will have to increase the nominal consumption, (to make you happy) and decrease the consumption (of consumer goods) in real terms, to fix the real problem. My guess? It will not work.

The current financial problem doesn’t just consist of an excess demand for money. We are also in a liquidity trap, and as such either banks are unwilling to lend money or debtors are unwilling to borrow (and the current situation is probably a mixture of both). So, we also need to restore confidence, and we need to question ourselves when believing that further monetary expansion by part of the Federal Reserve will do that.

Furthermore, most of the credit contraction which took place post-2007 was not the result of a rise in the demand for money. It was a result of a decrease in the volume of outstanding loans. For all intents and purposes, prior to 2007 there was an excess supply of fiduciary media, and the market was trying to establish equilibrium. By arguing that more money is necessary to meet an increase in demand for money you are assuming that credit has contracted well beyond what was necessary to restore equilibrium. I don’t think this is the case.